Government Debt and Deficits Are Not the Problem - Private Debt Is

Summary

In this Real News Network interview, economist Michael Hudson challenges the notion that public debt is the primary issue facing the U.S. economy. Instead, he argues that the real problem is private debt, which has ballooned due to bank bailouts and reckless lending practices. Hudson contends that the government can manage its debt without causing hyperinflation, as it has the power to print its own currency, whereas private debt must be repaid and is strangling consumer demand and economic growth.

Takeaways

• 📊 The speaker, Michael Hudson, argues that public debt is not the main issue facing the American economy, unlike private debt which has to be repaid.
• 💼 Hudson emphasizes the difference between public and private debt, noting that governments can print their own currency and are not at risk of insolvency in the same way as private entities.
• 💡 He points out that the U.S. public debt has been financed largely by the Federal Reserve through money creation, contradicting the common belief that it crowds out other markets.
• 🏦 Hudson criticizes the lack of discussion on the $13 trillion increase in government debt due to bank bailouts since 2008, which he sees as a significant driver of public debt.
• 💔 He highlights the social impact of high levels of private debt, which leaves less disposable income for consumers, affecting demand in the economy.
• 🏠 The script discusses how the increase in mortgage debt, up to 43% of income, is unsustainable for many families, leading to reduced spending on goods and services.
• 📉 Hudson suggests that the focus on fiscal responsibility by reducing government debt is misguided and could be detrimental to economic growth and employment.
• 💬 There is a call for a reevaluation of the policy approach to debt, with a need to address the burden of private debt rather than focusing solely on public debt.
• 🌐 Hudson notes that the rest of the world is imposing austerity measures, which is contributing to the flow of money into U.S. Treasuries as a safe haven.
• 📈 He argues that inflation is not caused by government money creation but by commercial banks inflating asset prices, leading to debt bubbles.
• 🚫 The script suggests that current policies are not addressing the root cause of economic problems, which is the overhang of private debt from the bubble economy.

Q & A

What is the main argument of Michael Hudson regarding the American economy's biggest challenge?

Michael Hudson argues that the American economy's biggest challenge is not public debt, but rather private debt, which must be repaid and is currently at unsustainable levels.

According to Hudson, why can governments with their own currency not become insolvent?

Hudson explains that governments can't become insolvent with debt in their own currency because they have the power to issue money, avoiding insolvency.

What does Hudson believe has been the main driver of increased government debt since 2008?

Hudson points out that the main driver of increased government debt since 2008 has been the bank bailouts, which amounted to $13 trillion, rather than social programs.

How does Hudson describe the current approach to handling private debt in the American economy?

Hudson criticizes the current approach as one that avoids addressing the real issue of private debt by instead focusing on inflating asset prices, particularly in real estate, and pushing for more borrowing.

What is Hudson's view on the relationship between government debt and inflation?

Hudson suggests that the concern about government debt leading to hyperinflation is misplaced, as the U.S. has been increasing its debt without limit since 2008 without such consequences.

Why does Hudson argue that printing money for the banks is acceptable but not for the real economy?

Hudson implies a double standard where money creation for banks to reinflate asset markets is seen as acceptable, while money creation to stimulate the real economy is not.

What historical rule of thumb did banks use to limit home mortgage payments to ensure affordability?

Historically, banks limited home mortgage payments to no more than 25% of a borrower's income to ensure affordability, a rule that has since been relaxed.

How does Hudson connect the level of private debt to the demand in the economy?

Hudson connects high levels of private debt to reduced demand in the economy, as a significant portion of income is consumed by debt payments, leaving less for consumption.

What is Hudson's opinion on the government's role in the student loan market?

Hudson criticizes the government's policy of guaranteeing student loans without concern for the recklessness of the loans or the ability of students to repay them.

What does Hudson suggest is the consequence of not addressing the issue of private debt?

Hudson suggests that failing to address private debt will lead to economic austerity and potential future crises, similar to what has been seen in countries like Greece, Spain, and Ireland.

How does Hudson view the current policy of promoting more private debt as a solution?

Hudson views the current policy as flawed, arguing that it's based on the belief that Americans can borrow their way out of debt, which he sees as unsustainable.

Outlines

00:00

💼 Public Debt Misconceptions

In this segment, Paul Jay introduces the discussion on public debt with Michael Hudson, a distinguished economics professor. Hudson challenges the prevailing view that public debt is the main economic challenge for the U.S. He argues that public debt is not an issue since governments can print their own currency and are not at risk of insolvency. He points out that the U.S. public debt has actually decreased as a proportion of GDP and national income, and is largely financed by the Federal Reserve. Hudson criticizes the Washington consensus for ignoring the real issue, which is the massive increase in private debt, particularly in the banking sector, since the 2008 financial crisis.

05:03

🏦 The Impact of Private Debt on the Economy

Michael Hudson elaborates on the difference between public and private debt, emphasizing that private debts are the real problem because they must be repaid. He discusses how the U.S. government has increased private debt by bailing out banks and inflating the real estate market, leading to a situation where a significant portion of Americans' income is consumed by debt repayments. Hudson highlights the absurdity of the situation where the government encourages more private debt while simultaneously advocating for austerity measures that affect social programs and labor. He also touches on the role of the Federal Reserve in creating credit for banks, which has contributed to the increase in government debt.

10:06

📉 The Consequences of Austerity and Inflation

In the final paragraph, Hudson and Jay discuss the consequences of austerity measures and the role of the banking system in creating inflation. Hudson argues that the government's policy of not addressing the private debt issue and instead pushing for more debt to reinflate the economy is flawed. He points out that the banking system has been creating money irresponsibly, leading to asset bubbles and increased private debt. Hudson warns that the government's refusal to address the debt problem through market solutions, such as writing down debts, will lead to economic stagnation and potential disaster similar to that seen in Greece, Spain, and Ireland. He concludes by criticizing the belief that more debt can solve the problem of existing debt.

Keywords

💡Public Debt

Public debt refers to the money owed by a government to creditors. In the video, Michael Hudson argues that public debt isn't the critical issue for the economy, as governments can manage it by printing money. He contrasts this with private debt, which must be repaid, highlighting the difference between the two.

💡Private Debt

Private debt is the money owed by individuals or businesses, typically to banks. Hudson emphasizes that private debt is a bigger problem for the economy than public debt because it must be repaid, leading to financial strain. He critiques the government's focus on inflating private debt, especially in real estate, as unsustainable.

💡Quantitative Easing

Quantitative easing is a monetary policy where central banks create money to purchase financial assets, often to inject liquidity into the economy. Hudson mentions it as a method used by the Federal Reserve to bail out banks by buying their 'junk mortgages,' which has significantly increased public debt without directly benefiting the broader economy.

💡Austerity

Austerity refers to government policies aimed at reducing public spending to decrease national debt. Hudson criticizes austerity measures, particularly those targeting social programs, arguing that they exacerbate economic problems by reducing demand and employment. He contrasts this with the lack of austerity for bank bailouts.

💡Bailouts

Bailouts involve the government providing financial assistance to struggling businesses, typically banks, to prevent their failure. Hudson argues that the massive bailouts given to banks after the 2008 financial crisis contributed significantly to the public debt while failing to address the underlying issues of private debt.

💡Social Security

Social Security is a government program that provides financial assistance to retirees and disabled individuals. Hudson points out that discussions in Washington often focus on reducing Social Security benefits to manage public debt, which he views as misguided, especially when compared to the lack of scrutiny on bank bailouts.

💡Reflating Real Estate

Reflating real estate refers to efforts to boost the real estate market by encouraging more borrowing and higher property values. Hudson criticizes this approach, explaining that it leads to increased private debt, which burdens homeowners and the broader economy, rather than addressing the fundamental issues of economic demand and employment.

💡Hyperinflation

Hyperinflation is an extreme and rapid increase in prices, often due to excessive money printing. In the video, Hudson discusses the fear that printing money to finance public debt could lead to hyperinflation. However, he argues that the real inflationary pressure has come from the banking sector, not government spending.

💡Treasury Bills

Treasury bills (T-bills) are short-term government securities that are used to borrow money. Hudson acknowledges that the U.S. government raises money through T-bills, which are seen as a safe investment globally. However, he questions the narrative that excessive government debt will lead to a loss of confidence in the dollar.

💡Foreclosure

Foreclosure is the process by which a lender takes control of a property when the borrower fails to make mortgage payments. Hudson contrasts foreclosure with the idea of writing down debt to manageable levels, criticizing the government's preference for protecting banks over homeowners, which leads to widespread foreclosures.

Highlights

Public debt is not the main issue facing the American economy, according to Michael Hudson.

Hudson argues that governments can't become insolvent as long as they control their own currency and printing presses.

U.S. public debt has decreased as a proportion of GDP and national income, contrary to popular belief.

The Federal Reserve has been financing public debt by simply printing money.

Hudson criticizes the Washington consensus for ignoring the real cause of increased government debt: bank bailouts.

He points out that the government has increased private debt by $13 trillion since 2008 through bank bailouts and quantitative easing.

Hudson suggests that the government's policy of inflating the private debt market and real estate market is unsustainable.

The discussion highlights the difference between government and private debt, with the latter being more burdensome.

Hudson explains that private debts must be repaid, unlike government debts, which can be managed differently.

He criticizes the government for not addressing the real estate debt crisis and instead pushing for more debt.

Hudson discusses how the increase in mortgage debt as a percentage of income is crippling families' ability to spend.

He connects the lack of demand in the economy to the high levels of debt that Americans are forced to service.

Hudson warns that the government's focus on fiscal responsibility could lead to economic stagnation.

He argues that the government should not be reducing deficits but instead stimulating the economy through deficits.

Hudson points out the hypocrisy in the government's stance on printing money for banks versus the real economy.

The conversation touches on the global economic situation and how other countries' austerity measures are affecting the U.S.

Hudson emphasizes that the inflationary problem is not from government money creation but from commercial banks inflating asset prices.

He concludes by questioning the logic of borrowing one's way out of debt, which is the current policy direction.

Transcripts

PAUL JAY: Welcome to The Real News Network.

I'm Paul Jay in Baltimore.

As the effects of the sequester agreement ripple through the American economy--massive

cuts, that is, to social programs, and the military to some extent--one thing is clear:

both sides--President Obama and the leadership of the Republican Party--seem to think that

public debt is the biggest challenge facing the American economy.

Well, our next guest begs to differ.

Now joining us in the studio is Michael Hudson.

He was a Wall Street financial analyst, is now a distinguished research professor of

economics at the University of Missouri-Kansas City.

His recent books are The Bubble and Beyond and Finance Capitalism and Its Discontents.

Thanks for joining us again.

MICHAEL HUDSON: Thank you very much.

JAY: So I'm reading your material, and clearly you don't agree that public debt's the issue.

Why?

And if not, what is?

HUDSON: Well, the one kind of debt that really isn't an issue is public debt, because there's

a great difference between public and private debt.

Governments can own the printing presses.

No government can become insolvent as long as its debt is owed in its own currency.

And not only has the U.S. public debt gone down as a proportion of GAP [sic] and national

income; it actually is financed very largely by the Federal Reserve simply printing money.

The pretence in Washington is that when government debt goes up, it's because you're borrowing

from people and somehow crowding out other markets, and if you don't borrow from the

banks, if you print your own money, that somehow that's going to create hyperinflation.

JAY: Yeah.

I mean, the contention--the argument would be you can't keep doing this without any limits

to it, 'cause at some point people don't want your currency anymore.

HUDSON: The United States has been doing it without limit and has no limit for the last--since

the financial crisis of 2008.

Now, there's something very interesting.

All of the people in Washington--and I just came from a conference down there--they're

all talking about the debt that's owed to the Social Security people, recipients, to

the Medicaid recipients.

They're talking about--and the debt owed to labor and to most of the population.

And yet for every half a trillion dollar deficit that the government has spent into the economy,

it's created twice as much, $1 trillion, in the form of giveaway to the banks.

Not a single Republican, not a single Democrat has talked about what has actually increased

the government debt by $13 trillion since 2008.

And that is the bailouts of the banks, taking a Freddie Mae [sic] and Freddie Mac onto the

public balance sheet for $5.3 trillion to bail out the banks from their reckless mortgage

loans, the more than $2 trillion in quantitative easing when the Federal Reserve has just created

credit to give to the banks to buy their junk mortgages and cash for trash.

So somehow there's an idea that creating a credit to give to the banking system for President

Obama to say, we want the banks to get lending again and we want Americans to keep borrowing--.

They want to reinflate the private debt market, the real estate market back to its previous

unaffordably high levels.

JAY: So the point you're making is you're saying it's okay to, quote-unquote, print

money as long as it's going to the banks,--

HUDSON: Yes.

JAY: --but you can't print money--the reason I'm going quote-unquote is you don't really

have to print it.

It's just, like, tapping into the--

HUDSON: It's all on a computer keyboard now.

They don't even have [crosstalk]

JAY: --tapping at the keyboard.

But they won't create that same kind of money in order to get the real economy going.

HUDSON: Right.

Now, it's just amazing that the people who were talking about let's get the government

debt under control are only then following it by saying, so cut back Social Security

and squeeze labor and cut back social spending.

Not a single person is saying, cut back the giveaways to the bank; stop trying to reinflate

the market.

To the Obama administration and the Republicans they're saying more private debt is the solution.

Well, in reality, the problem is private debt, not the government debt.

And that's because unlike government debt, private debts have to be repaid.

And there are only two ways of resolving a private debt problem for an economy as a whole.

Either you do the American way, which is foreclosure and essentially foreclose on the real estate,

or you write down the debts to the ability that can be paid.

Now, in the past, when you had a financial crisis, the banks would have to liquify the

loans.

They take the loss on the loans.

The debts would be written down to whatever the market could afford.

That was the old market solution to the debt problem.

But now the government is saying, we cannot have a market solution to the debt problem

because our constituency, our largest campaign contributors, the banks, would lose, so we

have to keep the debts in place, and in fact we have to have even more debt to reinflate

the real estate market so that the banks won't lose any money on the fact that they've lent

much too much money that cannot be repaid.

So you have something very interesting.

The largest form of debt in America is real estate debt by homeowners.

When I first went to work on Wall Street in 1961, everybody had to--there was a rule of

thumb on Wall Street.

If you were taking out a home mortgage, they would limit it: the mortgage payment couldn't

exceed 25 percent of your income.

That was the rule of the thumb.

The banker would ask: how much money do you make?

And they'd say, okay, you can afford to pay 25 percent of that in debt.

Well, then the banks began to make larger and larger loans.

So last year, Sheila Bair, the head of the Federal Deposit Insurance Corporation, said

she recommended limiting the amount of mortgage debt service to 32 percent of the loans.

Well, just a few months ago, the federal housing agency of the government said, okay, the government

will guarantee nine out of every ten mortgages in America are now guaranteed by the federal

housing administration to the banks for up to 43 percent of the income of the borrower

to be paid to the banks as mortgage service.

Now, just imagine what that does to a family.

If you're paying 43 percent of your income to the banks for your mortgage, if you're

paying--some people are paying 25 percent of their income for student loans.

But forget student loans.

Let's say only 10 percent of your income, above that, goes for other bank loans, credit

card loans; you have 15 percent of your salary taken out for Social Security; and then you

have income tax.

Then you're only going to be able to spend about 20 percent of your salary on the goods

and services you produce.

JAY: And then they wonder why there's no demand in the economy.

HUDSON: That's exactly the point.

It's all about demand in employment.

And what the people who are talking about the debt situation in Washington are leaving

out of account is the employment.

How on earth are Americans going to buy what they produce if they have to pay all the money

to the bankers, and the bankers are using this money not to buy goods and services themselves,

they're using the money to make yet more loans to try to get yet more interest, and it's

[crosstalk]

JAY: Yeah, I'm seeing in my mail now I'm getting all these do you want a new credit card ads,

or envelopes are coming through again; TV ads for credit cards are in full steam again.

So I guess now that the banks have gotten a lot of free money from the Fed, they're

going to maybe perhaps start another credit bubble to try to get things going.

HUDSON: Well, that's the government--the government policy doesn't call it a credit bubble this

time.

They call it reflating real estate, and they call it a fiscal responsibility of balancing

the budget.

But fiscal responsibility for the government debt is irresponsible for the economy, 'cause

if the government doesn't run a debt, if the government doesn't run a surplus, then it's

not going to be pushing money into the economy.

And if the government doesn't use this opportunity that we're having now to run a deficit and

to--not to tax the Social Security recipients (this just occurred in January), not to add

to the tax withholding, if it does what the Republicans want and runs a surplus or balances

the budget, then all of the growth in the economy will be left to commercial banks to

finance.

The growth of private debt will grow to even more than the current 75 to 80 percent of

family income--.

JAY: That's even assuming the private banks are willing to loan, because part of the problem

is they don't want to loan because they don't trust the economy.

HUDSON: But as long as the government treats the entire loan system like student debt--the

government is now saying to the banks, loan whatever you want to students.

We don't care if they can't pay.

We don't care if your loan is reckless.

We, the so-called tax payer, will pay.

And it's not the taxpayer, of course; it's the Treasury that just creates the money to

pay.

So, first of all, there's a pretence that the taxpayer has to pay when the government

runs a deficit.

The taxpayers don't pay for the deficit; the government simply prints the money.

A private family can't do that.

If you run a deficit and you're a family balance sheet--.

JAY: But hang on.

A lot of the money they're raising is through Treasury bills, which is a form of a loan.

HUDSON: Yes.

JAY: They're not just--and there is a rising public debt, and they are paying interest.

It's very, very low right now, the interest the American government's paying on its debt,

but that could go up.

So it's not this isn't without risk of at some point paying serious interest.

HUDSON: Well, there are three sources that a government can borrow from.

They act as if--the only source they talk about is borrowing from the capital markets,

from the banks and the bondholders.

But the government can borrow from the Federal Reserve, no interest whatsoever, and simply

create the money.

That's what it's done for the $13 trillion of bailout that it's given Wall Street.

JAY: But they seem to believe there needs to be limits to that; otherwise, people lose

confidence in the dollar.

That's at least the logic they say.

And then they go out and they--but they--and they are getting almost interest-free money

now for T-bills, so they are borrowing it.

HUDSON: But it's--you're absolutely right.

That's just what they're saying.

And how can they say that people are losing faith in the dollar when the dollar has continued

to go up and up and up against the euro, against the pound sterling, against other currencies

that don't have the printing press?

The reason people are putting their money into Treasury bills, the reason the Treasury

bills, if you buy them, only yield half a percent or a quarter percent now, is because

other countries have faith that America has the printing press and can print the money.

So it's exactly the opposite of the Zimbabwe syndrome.

People talk about Zimbabwe, but only Zimbabwe can print its own money or America can print

its own money.

JAY: But there's clearly got to be some limit to how much you can do that.

Otherwise, give everybody $1 billion and, you know, life would be fine.

There are limits to this.

HUDSON: Yes, of course there's a limit.

The limit is so far not being reached because the rest of the world is imposing the very

kind of austerity that the Republicans are trying to force on America.

The rest of the world is saying, we want to be fiscally responsible even at the cost of

shrinking our economies.

So their economies are falling apart, and the savers in their economies are sending

their money into the United States.

So the reality is the opposite of the rhetoric that's being used by the politicians.

JAY: But the argument they would give you is that if you start printing too much money,

then people will lose confidence and they won't keep doing--they stop buying American

T-bills and they won't be sending money here.

Right now it's the safe haven for global money.

HUDSON: There is indeed one entity that has been producing too much money, way too much

money, irresponsibly, and that's the banking system that led to the credit crisis.

It was--the money that has been inflating prices has been the commercial banks inflating

real estate prices, inflating education prices, inflating prices for stocks and bonds that

have just had a huge bubble.

So the inflationary money creation is by the commercial banks, not by the government.

And nobody's talking about that.

Of course they've reached the limit.

But it's the banks that are creating money.

And somehow people have believed that inflation is very good if what's going up is the price

of your home.

But then when the price goes down, what's really gone up has been your debt, and what

people thought was an asset boom in net worth and wealth creation (as Alan Greenspan said),

it turns out to be debt creation.

And all--they're left with a massive debt.

And it's the private debt that is the residue of the bubble economy that is now the big

problem in overlaying the economy.

And instead of trying to resolve that problem by writing down the debts to the ability to

pay, by writing down housing debts to the real value of the house, so the current mortgage,

or writing it down to the one-quarter of your income that used to be normal and is normal

in other countries--by refusing to roll back the public debt and write it down, the government

is pushing austerity here, just exactly as the pound is doing in Europe, as the Eurozone

is doing.

So all you have to do is look at Greece, Spain, and Ireland, and you say, is that going to

be America's future under this kind of pretence that government debt's bad, bank debt is good,

run into more debt, that will save us?

It's as if they believe the Americans can borrow their way out of debt.

That's the current policy.

JAY: Thanks for joining us, Michael.

And thank you for joining us on The Real News Network.